EPGP – Cost and Management Accounting (CMA)

Group Assignment- 3

EPGP – 14, Section – C

Submitted By:

Roll No Participants Name

EPGP-14C-010 Aktar Khan
EPGP-14C-025 Ashutosh Pandey
EPGP-14C-026 Atul Agrawal
EPGP-14C-085 Pramod Meshram
EPGP-14C-094 Rakesh Kumar Acharya
EPGP-14C-101 Sandhan Pal
Case-2
Bill French Accountant:
Q1. What are the assumptions implicit in Bill French’s determination of the company’s Break-even
point?

Answer:
 The company has a single breakeven point, which is determined using the average of the
three items.
 Product mix will remain constant, revenue and expenses behave in a linear manner
o Assumed that sales prices and volumes for each product remain the same
 Fixed costs will remain the same for Products A, B and C despite falling production for
Product A
o Additional fixed costs will be allocated to Product C due to the increase in
production of Product C

Q2. On the basis of French’s revised information, what does next year look like:

a. What is the Break-even point?

Answer:

For total 1,189,275 units

Fixed Costs = CM * Units 640,000
= (1.1589-.6207) * X
640,000 = .5382X
X = 1,189,275

The new breakeven point was found by adjusting the original numbers based on projections
presented in the case study:
 Price of product C is doubled
 Variable costs increase by 10%
 Fixed costs increase by $10,000 per month
 Actual Sales Volume Increases
 Decreased Volume of A, Increased Volume of C

b. What level of operations must be achieved to pay the extra dividend, ignoring union
demands?

Answer:

Units = (Fixed Cost + Net Profit) / CM

Units = (640,000 + 200,000) / (1.1589-0.5643) Units = 1,412,782
The profit needed to meet desired cash flows is equal to the money held for the business ($25,000)
combined with the regular and special dividends ($50,000 and $25,000) respectively. In addition,
since taxes are 50%, the after-tax amount must be doubled to arrive at the desired net profit
($200,000). Therefore, to arrive at $200,000 net profit, the operations must be produced 1,412,782
units.
 c. What level of operations must be achieved to meet the Union demands, ignoring bonus
dividends?

Answer:

Units = (Fixed cost + Net Profit) / CM

Units = (640,000 + 1 5 0 , 0 0 0 ) / (1.1589-0.6207)
Units = 1,468,012

Without 150,000 we get 1187384

The profit needed to meet desired cash flows is equal to the money held for the business ($25,000)
combined with the regular dividend ($50,000). In addition, since taxes are 50%, the after-tax
amount must be doubled to arrive at the desired net profit ($150,000). Therefore, to arrive at
$150,000 net profit, the operations must produce 1,468,012 units.

d. What level of operations must be achieved to meet both dividends and expected union
requirements?

Answer:

Units = (Fixed cost + Net Profit)/CM

Units = (640,000 + 200,000) / (1.1589-0.6207) Units = 1,560,924

The profit needed to meet desired cash flows is equal to the money held for the business ($25,000)
combined with the regular and special dividends ($50,000 and $25,000) respectively. In addition,
since taxes are 50%, the after-tax amount must be doubled to arrive at the desired net profit
($200,000). Therefore, to arrive at $200,000 net profit, the operations must produce 1,560,924
units.

Q3. Can the Break-even analysis help the company decide whether to alter the existing product
emphasis? What can the company afford to invest for additional C capacity?

Answer:

The break-even analysis can absolutely help the company decide on whether or not to alter the
existing product emphasis. For example, the contribution margin on the original product mix
was $0.45 per unit. After the change in product mix (decrease A by 200,000 and increase C by
450,000) along with the doubling of the price for C, the contribution margin was now $0.54 per
unit. As a result, the company would now be able to sell less units to cover the fixed costs as a
result of the increased contribution margin.
Given the revised information, the company would be able to invest $249,863, or the net profit
made on Product C, for additional C Capacity.
Q4. Is this type of analysis of any value? How can it be used?

Answer:

Yes, this analysis is of great value as it allows individuals to understand the relationship between
costs (variable and fixed), production, and profit (net and after-tax). It allows managers to put
together different scenarios based on what they think may or may not happen in the coming year
and determine what kind of cash flows to expect. Managers are able to plug in different product
mixes, tax rates, costs, and any other possible variables to see how the changes might affect
profits. Individuals can also use this type of analysis to see which products are performing well
and which ones might need to be discontinued.

Case-3
Hilton Manufacturing Company:
Q1. If the company had dropped product 103 as of January 1, 2004, what effect would that action
have had on the $158,000 profit for the first six months of 2004?
Answer:
The total Revenue of the company is calculated as
below:
Total revenue including 103 21382
Revenue of 103 5202
Total revenue excluding 103 16180

Total Variable costs of 103

In
Variable costs of 103
thousands
Direct labor 1341
Compensation Insurance 88
Materials 946
Power 59
supplies 68
Repairs 20
other income -10
Total Variable costs of 103 2512

Total costs excluding 103

Total costs including 103 21224
Total Variable costs of 103 2512
Total costs excluding 103 18712
 Net loss after removing 103
Total revenue excluding 103 16180
Total costs excluding 103 18712
Total loss -2532

Note: All the values are in thousands

Q2. In January 2005, should the company reduce the price of product 101 from $9.41 to $8.64?
Answer:
The change in revenue for the reduction of the price of product 101 is shown
below:

  Unit Price No. of units sold Total Revenue

Revenue with the old
price $9.41 $7,50,000 $70,57,500
Revenue with the new
price $8.64 $10,00,000 $86,40,000
Increase in Revenue $15,82,500

There is an increase in revenue of

$1582500

The changes in variable costs (materials and suppliers costs increase by 5%) of product 101 is shown
below:

(Amounts are in
thousands)

Old Variables costs of 101 New Variable costs of 101

Variables costs Cost for 750000 Cost for 1000000
Unit Costs units Unit Costs units
Direct Labor 2.3282 1746 2.3282 2328
Compensation
Insurance 0.1481 111 0.1481 148
Materials 1.3766 1032 1.3766 1445
Power 0.0403 30 0.0403 40
Supplies 0.0941 71 0.0941 99
Repairs 0.0319 24 0.0319 32
Other Income 0.0184 14 0.0184 18
 
Total Variable costs of
101 3028 4111
Change in variable cost -1083
Total Increase in variable costs =
1083000
Total Increase in
revenue in case of 1582500
price drop =
Total Increase in profit = Total increase in revenue-Total
increase in costs
499500

Company should reduce the price because Contribution margin for 101 is high at
$8.64.

Q3. What is Hilton’s most profitable product?

Answer:
(Amounts are in
thousands)
  Product 101 Product 102 Product 103
Revenue 9279 6900 5202
Variable Costs:
Direct Labor 2321 1619 1341
Compensation Insurance 148 115 88
Materials 1372 1251 946
Power 40 66 59
Supplies 94 126 68
Repairs 32 40 20
Other Income 18 14 -10
Total Variable costs 4025 3231 2512
Contribution margin 5254 3669 2690
Total units sold 996859 712102 501276
Contribution margin/unit 5.27 5.15 5.37

Note: Have taken data from exhibit

4
Hilton’s most profitable product is product 103 by considering the variable costs and per unit
contribution margin.

Q4: What appears to have caused the return to profitable operations in the first six months of 2004?

Answer :
Sales of product 102 is noted as 6900 for the first six months of the 2004 which is 70% of the total
sales of 2003 (9977). This increase in demand for the product 102 caused profitable operations and
also Mr. Weston changes to marketing and productions based on the monthly statements reduced the
costs.